How to Identify a Pump and Dump Stock Scam
Ever gotten one of those "too good to be true" emails that claims you can double your money once a week? How about those hot stock tips that can do no wrong? Chances are, if they were given to you over the Web, it's almost a certainty that thousands like you got that advice the same way. Rest assured, the person sending you that advice already has a position in that stock and hoping that everyone buys into the hype, forcing his stock higher and higher. Learn how to identify these pump and dump scams below.
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Instructions
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Identify the sender of the email you received or owner of the advertisement. Identification of the sender is the first line of defense against a scam. Meaning, if the person(s) has attempted such acts in the past, it's likely such behavior will continue.
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Check the sender or owner's website for more details. If you locate a prolonged story of something totally off the wall, or something too good to be true, it's likely a scam. Keep an eye out for money back offers and extensive attempts to convince you that this stock service is legitmate. The phrase, "I think thou does protest too much" is directly applicable, and how seasoned financial professionals refers to these services.
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Check the credibility of the sender or advertiser. This can be as simple as typing in the subject line of the email/advertisement and the word "scam" into Google's search engine. Rarely are you the first person to be taken by scams, so it's commonplace for high profile bloggers or scam sights to publish their findings, especially the negative ones.
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Identify how this email or advertisement was transmitted to you. If you received an email that went directly into your spam filter, or you saw an advertisement on a shady financial blog, be very aware of the information quality. Ad space is cheap to purchase, so even if the website is reputable, always keep an eye out for manipulative stock advice.
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Calculate how many times you have seen this particular stock advertised? If more than once, it's likely the publisher has began a marketing campaign to push a worthless stock that he might own.
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Locate where the stock trades. If the stock trades on the OTC (Over The Counter) or Pink Sheet Exchanges, it is often an indicator of a scam. Stocks traded on these exchanges do not fulfill the rigorous requirements of the NYSE, Nasdaq, or Amex exchanges.
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Perform your own research. Go to a site like Google Finance or Yahoo Finance to validate the email or advertisements claims. Also, go to the Edgar Database, hosted by the Securities and Exchange Commission (SEC), to check for any mandated regulatory filings.
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Maintain a cynical attitude. It is highly unlikely that someone would be willing to share such high value information out of the blue unless they are motivated by selfishness or greed, so do not take them for their word without fully investigating the details for yourself.
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Tips & Warnings
If it sounds too good to be true, it's probably a scam. Just back away and don't buy into the high pressure sales pitch.
Many successful pump and dump schemes will hire an army of bloggers to promote their legality and validity. A good stock sells itself without the need of mass marketing.
If the site gives records of past performance, contact the owner and ask for detailed and verified proof of buys and sells. Do not take someone's word because anyone can be an expert and/or write anything on the internet.
Never pay for a high profile pump and dump scam. It's likely you will also lose your cash, as well as any money that goes into the stocks you purchase.
The P&D scam artists will sell their own stock during any rapid price appreciation, so beware of large quantities of stock being sold into this rally. It can be located in the trading volume charts/tables.
Beware of any gimmicks, such as a crystal ball or magic stock picking robot. If such things existed, it would not be mass marketed as email spam.
